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Have courts left the Pinegate open?

Most bankruptcy lawyers are familiar with section 1111(b) and its attempt to rectify a perceived unfairness resulting from the ruling in In re Pine Gate Assocs., Ltd., Case No. B75-4345A, 1976 U.S. Dist. LEXIS 17366 (N.D. Ga. Oct. 14, 1976). In Pinegate, the creditor’s collateral had depreciated as the result of a cyclical market fluctuation. The debtor crammed down a chapter 11 plan over the creditor’s objection, leaving the lower-valued secured claim impaired and discharging the large unsecured deficiency claim, on which the creditor received a nominal distribution. Thereafter, when the market rebounded, the reorganized debtor refinanced the property, paid off the secured claim at its reduced value and pocketed the balance of the proceeds.

The Pinegate decision came down in the waning years of the Bankruptcy Act. But the issue it presented became part of the discussion on the shape and structure of the Bankruptcy Code then being formulated by Congress. The legislators attempted to address the perceived “Pinegate problem” in several ways. However, the principal means was through Section 1111(b) of the Bankruptcy Code, which permitted a secured creditor to elect to relinquish its deficiency unsecured claim and have its entire claim treated as secured. In order to be crammed down on the electing secured creditor, the debtor must provide a stream of payments “on account of the claim,” that equals the full allowed amount of the claim but which has a current value equal to the value of the creditor’s lien on its collateral. 11 U.S.C. section 1129(b)(2)(A). If the collateral has a current value less than the face amount of the claim, this could be accomplished, for example, by a new note in the full face amount of the debt, but bearing a below market interest rate that reduces the “value” of the obligation to the current value of the collateral.

This change can have an impact in several situations. If the Bankruptcy Court has undervalued the collateral for bankruptcy purposes, or if the property is temporarily depressed by virtue of cyclical market conditions, the election could serve to protect the secured creditor in the event of a subsequent sale or refinancing. The secured party’s lien would capture any appreciation in property value on subsequent sale. And the debtor would be required pay the full amount of the secured claim in order to refinance the property.

Several courts have confronted the question whether payments “on account of the claim” should include only payments on the principal amount of the debt or whether post-confirmation interest may be included in that total. Cases such as First Federal Bank of California v. Weinstein (In re Weinstein), 227 B.R. 284 (B.A.P. 9th Cir. 1997) and In re Bloomingdale Partners, 155 B.R. 961 (Bankr. N.D. IL 1993) include post-confirmation interest in the calculation of the total amount of payments needed to satisfy section 1129(b)(2)(A)(i)(I). In contrast, some have argued that post-confirmation interest should not be considered as payments “on account of the claim,” but rather as part of the calculation of the discounted value of the payment stream. By counting post-confirmation interest toward the total of payments required to equal the allowed amount of the claim, it would seem to prevent the full effect of the section 1111(b) election, since it would not assure that the electing secured received the full principal amount of its claim.

If the legislative solution intended by section 1111(b) is to be fully achieved, it would require that only principal payments should be counted toward the payment stream. Counting post- confirmation interest toward that total necessarily dilutes the benefit of the section 1111(b) election for the secured creditor.

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